Alter Ego and Joint Partner Trusts in British Columbia

If you are 65 or older and own investments or a home, you may have heard that an alter ego or joint partner trust can reduce probate and defer tax. These trusts are real and recognized by the Canada Revenue Agency (CRA), but they come with strict conditions.

This article sets out what the federal rules require, how the tax deferral works, and what to think about for probate in British Columbia.

This article covers the law of British Columbia.

What the two trusts are

An alter ego trust (CRA code 336) is created after 1999 by a settlor aged 65 or older. The settlor must receive all the trust income during their lifetime and be the only person who can receive income or capital from the trust during that time.

A joint spousal or common-law partner trust (CRA code 335) is also created after 1999 by a settlor aged 65 or older. The settlor and their spouse or common-law partner receive all income until the later of their deaths, and only those two can receive income or capital before then.

Both are inter vivos trusts, meaning trusts that are not testamentary. A trust is not treated as an alter ego trust if it elects so on its T3 return for its first tax year.

A testamentary trust, by contrast, is generally created on and as a result of an individual's death. An estate can qualify as a graduated rate estate for only up to 36 months after death, and it must designate itself as one on its first T3 return for a tax year ending after 2015. These are different tools from the trusts in this article, so it helps to know which one someone is describing.

How the tax deferral works

Every trust is generally deemed to dispose of most capital property at fair market value on the day 21 years after the latest of January 1, 1972, the trust's creation day and certain other determined days. This is called the 21-year rule.

Alter ego and joint partner trusts are treated differently. The deemed disposition day is the death of the settlor for an alter ego trust, or the later death of the settlor and spouse or common-law partner for a joint partner trust, not the 21-year anniversary. Tax on accrued gains is therefore deferred to that death.

Special rules also apply to rollover transfers between certain trusts, including between alter ego trusts and between joint partner trusts. Moving property into or between trusts can trigger tax consequences, so an accountant should review any plan first.

Probate: what to ask

In BC, a deceased person's estate vests in the personal representative. Probate fees are based on the gross value of BC property in the Statement of Assets, Liabilities and Distribution. The idea behind these trusts is that property already held by the trustees is not owned personally at death, so it may not form part of that statement.

Whether that works in practice depends on the trust being properly set up, the assets actually being transferred, and how each asset is titled. A home, for example, involves land title filings and tax questions. A lawyer and accountant can confirm how your assets would be treated.

What the trustee has to do

Whoever you name as trustee takes on legal responsibilities under the Trustee Act. A trustee may invest trust property in any form of property or security in which a prudent investor might invest, but not in a manner inconsistent with the trust. When investing, the trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise.

• A trustee may delegate investment authority to an agent to the degree a prudent investor could under ordinary business practice, and must set the investment objectives and act prudently in choosing and monitoring the agent. Delegation is not allowed where the trust requires the trustee to act personally.
• A trustee may receive a fair and reasonable allowance not exceeding 5% of the gross aggregate value of the estate, but those provisions do not apply where the trust instrument sets the trustee's allowance.
• Trustees who are not executors, administrators, testamentary trustees or judicial trustees may pass first accounts at any time, and on notice from a beneficiary a trustee must pass accounts annually.
• The court may relieve a trustee from liability for breach of trust if the trustee acted honestly and reasonably and ought fairly to be excused.

Because these duties are real, think carefully about who you would trust in the role and whether they are willing to take it on.

Comparing the two

What to do next

• List the assets you are considering moving and how each is titled.
• Ask an accountant what tax would apply on transfer and what T3 filings the trust would need.
• Remember a T3 return is due no later than 90 days after the trust's year-end.
• Ask a lawyer whether a trust fits your goals, including who would act as trustee.
• Ask about reporting: missing the specified information on reportable entities may lead to a late-filing penalty.

Frequently asked questions